Another Step Down

April 21, 1986

THE LONG DECENT of the interest rates continues. This time the Federal Reserve Board's decision to cut its discount rate follows the money markets rather than leading them. But this second reduction within six weeks constitutes an official blessing and reinforcement of the trend.

It is also an indication that the Federal Reserve is among those close watchers who do not quite believe that the American economy was actually growing at an annual rate of 3.2 percent in the first quarter of this year. That was the Commerce Department's preliminary estimate of GNP, published last Thursday, and a rate of 3.2 percent would indicate a very heartening expansion. But a good many economists -- including, apparently, a majority of the Federal Reserve -- question whether that figure is consistent with other data on sales and production that have been reported over the past several months.

Changes in the discount rate always reflect a weighing of risks -- in this case, as in most, the risk of inflation against the risk of slack and inadequate growth. This spring the Federal Reserve judges inflation to be the lesser danger. The miraculously lucky timing of the fall in oil prices gives monetary policy a degree of freedom that it rarely enjoys.

The Japanese government followed the Federal Reserve with a similar half-point cut, instead of preceding it by a few hours as it did in March. In both cases the two countries' central banks went to some lengths to demonstrate publicly their tight cooperation. That cooperation is one of the most useful and reassuring developments of recent months. Its purpose is to avoid rocking the currency exchange rates and the trade balances that depend on them. If the interest rates in both countries go down together, the differentials between them remain unchanged, and there is no sudden surge of capital from one to the other.

But last time there was a third partner in this exercise in coordination. This time Germany has not yet been heard from. The Germans apparently think that their interest rates are already low enough. Germany is the world champion in fighting inflation. Over the past year, consumer prices there have risen a microscopic 0.1 percent. Meanwhile, unfortunately, unemployment remains significantly higher there than in this country, not to mention Japan. That is a choice that the Germans made some time ago and, with an election coming in January, they evidently intend to stick with it. Perhaps it is also a deliberate choice to let the mark rise further against the U.S. dollar. The art of central banking is increasingly a matter of reconciling domestic political decisions with their international consequences.